While this blog regularly addresses legal issues and financial losses related to property damage and liability claims under homeowner’s policies, this article focuses on another related and very significant form of loss. When Florida homeowners purchase a property, they obtain title insurance, which provides protection against clouds on title. The title company will conduct a records search to ensure that there are no adverse claims against the property such as liens, easements, adverse ownership and/or possessory interests, or other encumbrances. If the title company fails to discover and disclose such an adverse interest, the title coverage will cover the loss suffered if a cloud on title is later discovered.

A recent decision from the 9th Circuit for Orange County addresses the proper measure of financial compensation when a title insurance company fails to resolve a title dispute in a timely fashion after electing a non-litigation approach to curing a title defect. This two-part blog post analyzes the court’s ruling in favor of the insured on the issue of coverage and damage. Part I of this blog post focuses on the court’s analysis of the coverage issue in the face of an 11th hour lack of coverage defense while Part II focuses on the appropriate calculation of damages.

In Contestabile v. Attorneys’ Title Insurance Fund, Inc., the policyholder filed a lawsuit after the insured discovered a recorded mobile home plat on the subject property that was not referenced or disclosed in the title policy provided by the insurer. Approximately eight months after issuance of the title insurance, the insured gave notice to the title company of the encumbrance upon discovery of the title defect during a survey of the property. The title insurer elected to resolve the issue by retaining an attorney to petition Volusia County to vacate the plat rather than to pursue litigation to clear title. The insurer opted for this option over two alternatives under the policy: (1) paying the homeowner the policy limit of $3,550,710 or (2) pursuing litigation to eliminate the cloud on title.

The title insurer filed a Petition to Vacate the plat approximately eleven months after receiving notice of the title defect. The county agreed to remove the plat only if the property owner acquiesced to an easement on the property. While the title defect was eventually cured after granting of the easement, the property owner indicated that the value of the property declined by $2 million. The plaintiff filed a lawsuit seeking the lost market value, carrying costs, and other actual losses or damages. The title insurer sought summary judgment on the issues of coverage and the amount of damages.

Court Rejects the Insurer’s 11th Hour Assertion of a Lack of Coverage Defense

The court gave short shrift to the claim the policy did not cover the title defect from the easement because the easement was covered as a loss and cloud against title, and the insurer presented no valid coverage defenses. However, the insurer also requested summary judgment regarding the mobile home plat. The court also found this contention regarding coverage unpersuasive. The insurance company acknowledged that the title defect was covered from the time the insurer was notified of the plat. Further, the insurer proceeded to handle the claim without a reservation of rights. The insurer also admitted that the claim related to the plat was treated as a covered loss multiple times in pleadings and discovery responses.

The insurer attempted to raise an 11th hour defense that the plat was previously cleared by the Marketable Records Title Act (MRTA) before the encumbrance was discovered in 2008, but the insurer never initiated any judicial proceeding to determine the plat had been extinguished by MRTA. However, no action was taken to establish that the plat was not a title defect under MRTA. The court ruled that the title insurance company waived or was otherwise barred from raising a MRTA defense that contested coverage after conceding the title claim was covered when the claim was presented and throughout the litigation process.

As the court explained, “when an insurance company assumes the defense of an action, with knowledge, actual or presumed, of facts which would have permitted it to deny coverage, it may be estopped from subsequently raising the defense of noncoverage.”

The court pointed out that the insured has a duty to allow an insurance carrier to control the defense as consideration for the insurer’s duty to handle the claim with appropriate diligence and care. Because the insured surrenders control over the process of resolving the claims dispute, the insurer is obligated to exercise appropriate decision-making and control. The court reasoned that an insured who relies to his or her detriment on the carrier’s decision to handle the claim a certain way is not subject to a subsequent denial of coverage after previous acknowledgement of coverage by the insurer. The insurer could have proceeded under a “reservation of rights”, which involves indicating that preliminary acts that assume coverage do not prejudice the insurer’s right to later assert a noncoverage defense. However, the insurer repeatedly acknowledged and affirmed coverage without a reservation of rights. Based on this reasoning, the court granted summary judgment for the insured on the issue of coverage of the claim.

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